The Collapse of Music Dealers and Music Licensing’s “Race to the Bottom”

What the demise of a sync music licensing company can tell us about the bigger machine

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The music selection during Aziz Ansari’s Master of None. The phenomenal success of Guardians of the Galaxy’s “Awesome Mix” soundtrack. An enthusiastic Taylor Swift singing “Jumpman” before faceplanting in an Apple Music commercial. Music has been masterfully wielded in visual mediums for as long as both have been around, but in this 21st century television renaissance and curation-obsessed generation, strategic song placements are more often celebrated as creative victories than decried as opportunistic moves by sellouts looking to make a quick buck.

It often takes an entire machine to make these multimedia miracles happen. The music synchronization licensing (or sync licensing) industry facilitates the use of music in commercials, films, television shows, video games, and more by clearing the rights to use both the master and the composition of the song and getting royalties paid to rights owners.

Last week, tremors shook the industry when news broke that Chicago-based music licensing and distribution company Music Dealers was going into liquidation and halting what appeared to be a strong upward trajectory, which included deals with corporate giants, future prospects of global expansion, and millions in revenue earned for independent artists on its service.

Founded in September 2008 by Eric Sheinkop, Jonathan Sheinkop, and John Williamson (who all left the company before 2016), Music Dealers established a database where independent artists could upload their music for perusal by brands and music supervisors. Music licensing was by no means a new phenomenon when Music Dealers hit the scene, but the company distinguished themselves by “pre-clearing” music, ensuring all rights to the music on their systems were cleared and permissions were granted for use. They also dealt in non-exclusive contracts, which allowed musicians to license their music elsewhere even if they also made it available on the company’s database. Music Dealers evenly split the fees earned upfront from placements with their artists and also took a 50% cut of publishing royalties earned from placements they negotiated.

The company made waves, landing deals with big brands and raising $5.25 million worth of funding in three years, with $2.18 million of that coming from a single investment round alone. A huge placement involving New Zealand outfit No Wyld’s “The Odyssey” turned the band into viral superstars overnight when the song appeared in a 2014 McDonald’s Winter Olympics campaign.

Last week, potential creditors of Music Dealers received letters notifying them that on July 12th, the company undertook “an assignment for the benefit of creditors,” which is similar to Chapter 7 bankruptcy, but governed by Illinois state law, not federal bankruptcy court. The company, “indebted to numerous secured and unsecured creditors,” would go into liquidation to pay those debts “so far as it is possible.”

It turns out that Music Dealers was in debt to the tune of $9.93 million, according to the same letter, which estimated the extent of the company’s debt based on its books and records. This appears to have been a long-term issue: Music Dealers had to take on debt to alleviate “significant cash flow issues” due to “significant startup costs and several years of operating losses,” the letter explained.

Music Dealers folded just a year after it had been named to the Inc. 5000, an annual ranking of the fastest-growing private companies in America. The industry power list noted that it had pulled in $8.5 million in revenue in 2014 and grown at a 317% rate over the past three years. Last January, the company made headlines when it announced that it had hit the $15 million revenue mark for over 18,000 independent musicians on its service.

So why and how did Music Dealers fail?

“We were generating a good amount of capital but we had already spent a good amount of operating capital to run the business and weren’t able to catch up on that,” Acting CEO Clay Johnson told Consequence of Sound.

“Ultimately it was a very typical business problem of ‘Do your sales cover your operating costs?’ and even as we decreased operating costs, we couldn’t catch up on some of the older payments and our bigger growth expenses.”

Music Dealers incurred significant startup costs through equity raises and also looked to scale the business “pretty aggressively” around 2013 to 2014, said Johnson. Doing research and development into the then-uncharted market of non-exclusive, pre-cleared music licensing cost money, and so did hiring staff and expanding the team. Typical industry delays in collecting royalties didn’t help either. Music Dealers had discussed buyout offers as late as June.

But the last straw was the loss of the company’s biggest client, which “abruptly terminated their contract with Music Dealers, resulting in a significant impact on liquidity, future revenues, and the resignation of several key employees,” as the letter to potential creditors noted. The unnamed client gave Music Dealers notice of the termination in June and stopped working with Music Dealers because “they had some changes in how they were going to do business with music,” said Johnson.

“My understanding was they were looking a little more global,” he said. “We’re mostly focused as an operation in North America. We do have a global community of artists, but they were looking to diversify their solution, because they have a number of global markets, and they were looking for local servicing.”

Johnson declined to name the client, but it has been rumoured that said client is The Coca-Cola Company, given the company’s long and close partnership: Coca-Cola bought a stake in Music Dealers in 2011, and both worked together as recently as January this year on the “Taste the Feeling” campaign. When reached for comment, Coca-Cola spokesperson Alison Brubaker would only confirm that the company stopped working with Music Dealers “recently.”

Music Dealers ceased operations the moment they gave notice of their assignment for the benefit of creditors. They went quietly, going dark on Facebook and Twitter and making no public statement until prompted by music technology site Hypebot. It still looks like business as usual on the company’s website, which remains up because Music Dealers is still collecting outstanding payments from clients and redirecting would-be clients looking for music to artists, said Johnson.

The unpublicized demise of Music Dealers has come as a particularly rude shock to managers and labels who are still owed outstanding payments. Producer and manager Tyler Neil Johnson told Hypebot that Music Dealers failed to pay one of his artists $2,600 “after countless emails and failed promises.” “It’s [sic] just sad because a lot of artists like my client were never given any warning about this and will probably never see that money,” he said.

Joseph Martin, who runs the label East Van Digital, also told Consequence of Sound that Music Dealers failed to make good on a deal for original demo music, a contracted project that was started and completed in early December. Multiple payment delays ran over months, and Martin reached out to Music Dealers several times with no response.

“Income such as licensing can be monumental in covering release expenses and putting some extra funds in the hands of our artists,” he said. “Aside from the runaround and the money outstanding, the lack of communication has been unprofessional to say the least.” (Martin has since received a letter notifying him of Music Dealers’ assignment for the benefit of creditors.)

However, there is recourse for musicians owed money by Music Dealers: They can contact the trustees handling Music Dealers’ liquidation, High Ridge Partners, to file an affidavit of claim. St. Louis-based licensing company Songfreedom has also put together a “rescue package” for musicians affected by the closure of Music Dealers. With enough musicians on board, Songfreedom will even help initiate class action litigation to collect debts from Music Dealers.

Going to such lengths to chase payments might seem futile, but in a business where musicians are getting paid less and less for sync licensing, it’s essential. In an age where income from selling records and playing shows is dwindling, more musicians are willing to license out their music than ever before, contributing to an ever-growing supply that was unheard of decades ago.

At the same time, television production budgets have taken a dip. A turning point was the 2007 strike by the Writers Guild of America, which was one of two strikes that affected television production at the time, says music supervisor and former licensing representative Jonathan Hafter of Big Sounds International. “They slowed production to a halt, and when people reorganized from that, that’s when you started to see budgets get slashed. There was real downward pressure on licensing fees.”

That said, the success of Netflix, Hulu, Amazon, and other contemporary television production companies have helped improve the number of sync licensing opportunities available. This has alleviated the problem somewhat, but budgets still remain small, which means licensing firms must snatch up more placements to earn the same amount of money a few jobs would have gotten them years ago. “It’s more of a game of small ball — you have to bat around the bases,” said Lyle Hysen, founder of music licensing company Bank Robber Music and president of Rough Trade Music Publishing. “It’s now just the volume and about trying to bulk up. It’s like licensing on ‘roids at this point.”

As music licensing grew into a robust — some say saturated — industry, business models became more varied, producing new, and often contentious, practices. “Pre-cleared versus cleared music is a big line in the sand,” said Hysen, whose company works primarily with the latter, where they get approval from the musician or label for every placement. Music Dealers did the former, though it also worked with composers to create custom music for clients.

Although Bank Robber Music does deal with a small amount of pre-cleared music, and Hysen was quick to note that Music Dealers’ model was simply “different” from his, “the whole pre-cleared thing does bring down the fees,” he said. “Because then the supervisors who aren’t music-driven can use anything from that particular catalog, and the paperwork people don’t need to work as hard. So it’s like, ‘Oh, that song’s pre-cleared? Less work for everyone! I’ll just use that.’”

Having a hefty database full of pre-cleared music (that was also not exclusive to the service, which meant potentially cheaper fees) undoubtedly had its appeal, particularly for music supervisors with limited means.

“It’s a business of connections and reputations, so you want to try and make everyone happy,” said Brian McKinney, CEO of music licensing and sound design company Brash Tracks. “Trust me, sometimes there are scenarios where a show needs to fill more than 10 cues in 30 minutes, and they only have a budget of around $5,000, so they can only afford to pay $500 each.”

But the sheer size of Music Dealers’ database, which allowed any musician to upload music as long as they had the rights to do so, also led to some doubt as to how much attention the company could possibly give to the artists whose music it was licensing, and — more cynically — whether Music Dealers really had independent musicians’ interests at heart.

Music supervisors have an easier time when given the option of cherry-picking independent music from a massive repository offering blanket licensing deals, said Hafter. “But it makes it totally impersonal and puts the big company in charge, which has no real incentive to work with an artist. I think before, music licensing was much more about an interpersonal relationship between the representative of the licensing department and the ad agency, for instance.”

“Brash Tracks prides itself on keeping a boutique vibe: We don’t sign more bands than we can handle and still provide individual service and attention too,” said McKinney. “I think it’s important to make the clients happy, but I personally feel that you’re representing the artists and need to do right by them. Think of it like a classroom. Keeping my company small means there’s fewer ‘students’ per ‘teacher.’”

Although musicians on Music Dealers were able to control the types of campaigns their music could be used in and the types of deals they could enter, they were only contacted about placements that ran over $2,500. However, this didn’t necessarily mean that the company didn’t care about artists at all.

“They are definitely out of all the companies I’ve worked with the one that connected with the artist the most,” said Yoo Soo Kim, frontman of indie rock band Hemmingbirds. That could be because both Hemmingbirds and Music Dealers are both based in Chicago, he conceded, but Music Dealers did make the effort to communicate with artists. “They followed us on social media, they helped put a show together at the John Hancock Center, and that was really cool. They did potlucks with artists.”

Hemmingbirds mainly worked with Music Dealers between 2010 and 2012, securing some notable placements, including a Playstation 3 game commercial and an ad for a regional realty company. Working with Music Dealers, which Kim often described as a “learning experience,” wasn’t ideal, but it wasn’t completely exploitative, either.

Although the 50% cut Music Dealers takes on its placement fees and publishing royalties initially seemed “really outrageous,” once Kim started talking to people at other music libraries, he realized that it was almost a standard percentage, especially for a non-exclusive contract. “We had a couple of licenses where it was under $100, and we would be like ‘Wait, what’s going on with this?’ It was frustrating to see, but it was something that we were aware of,” he said.

“Many of us within the industry recognize we are dealing with a ‘race to the bottom,’” said Kyle Merkley, a music supervisor at Toronto company Arpix Media, who points to the growing phenomenon of granting gratis licenses upfront and relying on backend royalties for revenue. “In essence, a producer is accessing music for free. If free isn’t the bottom, then I don’t know what is.”

Ultimately, although Music Dealers’ business model might not have been palatable or acceptable to some, it is still difficult to villainize or paint the company as a scapegoat when considering the unsavory and sometimes underhanded reality of the wider industry. Although Music Dealers is still talking to potential buyers and is in “stasis,” as Johnson puts it, the company is done for now.

“Obviously, all good things must come to an end. The disappointment I feel at having it come to this is…” Johnson trailed off. “Hopefully there’s bigger and better things for our artist community and the folks who were working here in the near future.”